USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 94-2042
WHITNEY BROS. CO., ET AL.,
Plaintiffs - Appellees,
v.
DAVID C. SPRAFKIN AND JOAN BARENHOLTZ, TRUSTEES
OF THE BERNARD M. BARENHOLTZ TRUST, ET AL.,
Defendants - Appellants.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW HAMPSHIRE
[Hon. Joseph A. DiClerico, U.S. District Judge]
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Before
Torruella, Chief Judge,
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Aldrich, Senior Circuit Judge,
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and Cyr, Circuit Judge.
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James P. Bassett, with whom Orr and Reno, P.A. and Samuel M.
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Sprafkin, were on brief for appellants.
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James R. Muirhead, with whom Peter D. Anderson and McLane,
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Graf, Raulerson & Middleton Professional Association, were on
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brief for appellees.
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July 20, 1995
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TORRUELLA, Chief Judge. At issue here is whether the
TORRUELLA, Chief Judge.
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Defendants were properly required to pay the Plaintiffs'
attorneys' fees. Plaintiffs/appellees are Whitney Brothers
Company ("Whitney Brothers") and Griffin M. Stabler, Whitney
Brothers' president, chief executive officer and director.
Defendants/appellants, David C. Sprafkin and Joan Barenholtz, are
the trustees of the Bernard M. Barenholtz Trust, Whitney
Brothers' majority shareholder.
In the underlying litigation, Plaintiffs sued to compel
Defendants to sell their stock in Whitney Brothers pursuant to a
written buy/sell contract. After two years of litigation, the
district court ordered the sale at Defendants' asking price and
held that the Plaintiffs were entitled to satisfy the purchase
price with a prepayable promissory note. The district court also
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concluded that the Defendants had resisted their obligations
under the buy/sell agreement in bad faith, and accordingly used
its inherent powers to shift the Plaintiffs' attorneys' fees.
The district court predicated its bad faith finding on, inter
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alia, the Defendants' continuous insistence that the purchase
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price was not prepayable.
On appeal, we reversed the district court's judgment
with respect to prepayment. The Defendants filed a Motion to
Reconsider the imposition of attorneys' fees in light of our
reversal on the prepayability of the note. The district court
held that the fee award was still justified but amended it to
exclude fees earned in connection with the prepayment issue.
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Defendants now appeal. For the following reasons, we vacate that
portion of the court's order imposing fees and remand for further
proceedings consistent with this opinion.
BACKGROUND
BACKGROUND
Whitney Brothers is a New Hampshire corporation that
produces wooden learning materials. Bernard Barenholtz acquired
62.6% of the company's outstanding shares in 1969. Ten years
later, he transferred these shares to the Bernard M. Barenholtz
Trust (the "Trust") and named himself and defendant David
Sprafkin trustees. Plaintiff Griffin Stabler owned 32.7% of the
shares, and his son, David Stabler, owned the remaining 4.7%.
On January 27, 1987, Whitney Brothers, the trustees,
and Griffin Stabler executed a written buy/sell agreement ("The
Agreement"). Under The Agreement, Whitney Brothers would buy the
Trust's shares within ninety days of the death of Bernard
Barenholtz and buy Griffin Stabler's shares within ninety days of
Stabler's death. To determine the purchase price, the parties
would plug an agreed-upon appraisal into a formula to determine
the purchase price. If the parties could not agree on an
appraisal, they would each get their own and plug the average
into the formula. The contract also provided for payment by a
promissory note, with monthly installments over ten years at 10%
interest per annum. The Agreement did not mention whether
prepayment of the note was permissible.
On February 3, 1987, Bernard Barenholtz' (and
Defendants') attorney Samuel M. Sprafkin wrote a letter advising
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Mr. Barenholtz that the promissory note should be prepayable
without penalty. The district court found that the parties
orally agreed to the letter's prepayment provision. Barenholtz
then placed the letter in a file with the written contract.
When Bernard Barenholtz died, on August 5, 1989, his
daughter, defendant Joan Barenholtz, assumed his trustee
position. A few days later, plaintiff Stabler and defendant
Sprafkin discussed the contract's required stock sale. One of
the parties asked E.F. Greene to update a past appraisal of
Whitney Brothers.1 Sprafkin rejected Greene's appraisal;
Whitney Brothers accepted it. Relying on Greene's appraisal,
Whitney Brothers tendered to Defendants a prepayable promissory
note for $1,178,000 for the stock.2
Instead of responding immediately, Defendants secured a
significantly higher appraisal from Alfred Schimmel, a real
estate appraiser from New York City. They then rejected Whitney
Brothers' tender by letter, without mentioning the note's
prepayment clause. When Stabler learned of Defendants'
appraisal, he rejected it as too high.
Ultimately, Plaintiffs sued to compel the transfer of
the stock. Ten months later, on December 13, 1990, as part of
their cross-motion for summary judgment, Plaintiffs offered to
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1 The parties disagree over who requested the update.
2 Defendants contend that Stabler made the tender knowing that
they did not accept Greene's appraisal and planned to obtain one
of their own.
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tender either $1,349,3433 immediately or, if the court found
that The Agreement did not permit prepayment, that amount over
ten years at 10% interest. Defendants again rejected the tender.
They now contend that they rejected it because: (1) it omitted
$145,000 worth of interest that had accrued since November 3,
1989, 90 days after the death of Bernard Barenholtz, and (2) it
was invalid because the first option permitted prepayment, and
the second option was conditioned upon a court judgment that
prepayment was prohibited. Plaintiffs maintain that the
Defendants continually and in bad faith resisted their
obligations under The Agreement so that they could sell the stock
to one of Whitney Brothers' competitors at a higher price.
In response to the cross-motions for summary judgment,
the district court: (1) ordered Defendants to sell their stock;
(2) found that Plaintiffs were not entitled to prepay the note;
and (3) decided that a trial was necessary on the issue of the
stock price. See Whitney Bros. Co. v. Sprafkin, No. 90-54-S
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(D.N.H. filed June 5, 1991)(the "Summary Judgment Opinion").
After a six-day trial, the court issued an order in
which it: (1) required the Plaintiffs to pay $1,349,343 for the
stock;4 (2) reconsidered and reversed, sua sponte, its previous
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order and ruled that the parties' oral agreement regarding the
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3 This was the price calculated under the contract by plugging
the average of the two appraisals into the formula.
4 The court held that the Plaintiffs were bound by their
summary-judgment-motion stipulation that the stock price was
$1,349,343.
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prepayability of the note was binding and, therefore, that the
Plaintiffs could pay for the stock with a prepayable promissory
note; (3) ruled that interest on the note would begin to accrue
when it was executed, and not before; and (4) used its inherent
powers to assess attorneys' fees against the Defendants based on
their bad faith conduct throughout the litigation.5 Whitney
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Bros. Co. v. Sprafkin, No. 90-054-S, 1992 WL 686272 (D.N.H. Sept.
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30, 1992)("the Order"). The Order cited the Defendants' refusal
to accept a prepayable note despite their oral agreement to do so
as one of five instances of their bad faith.
On appeal (the "First Appeal"), we, inter alia,
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reversed the district court's judgment with respect to the
prepayability of the note, holding that The Agreement precluded
the Plaintiffs' efforts to prepay regardless of whether a
subsequent oral agreement provided for prepayment. Whitney Bros.
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Co. v. Sprafkin, 3 F.3d 530 (1st Cir. 1993).
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Defendants then filed a motion asking that the court
reconsider the imposition of attorneys' fees in light of our
reversal on the prepayment issue. The court denied the Motion to
Reconsider without a hearing,6 holding that the integrity of the
court's previous bad faith finding was not damaged by this
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5 Although the parties briefed the issue, the district court
imposed the fee award without the benefit of a hearing.
6 Judge Stahl, who presided over the trial and issued the Order,
requested that the matter be assigned to another judge after he
was appointed to the Court of Appeals for the First Circuit.
Judge DiClerico presided over the remainder of the case,
including the Defendants' Motion for Reconsideration.
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Court's reversal on the prepayment issue. The court did,
however, amend the fee award to exclude all fees earned in
connection with the prepayment issue. Defendants now appeal.
STANDARD OF REVIEW
STANDARD OF REVIEW
We review a district court's imposition of sanctions
under its inherent power for an abuse of discretion, Chambers v.
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NASCO, 501 U.S. 32, 55 (1991), giving recognition to the premise
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that the "district court is better situated than the court of
appeals to marshal the pertinent facts and apply the fact-
dependent legal standard" that informs its determination as to
whether sanctions are warranted. Cooter & Gell v. Hartmarx
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Corp., 496 U.S. 384, 402 (1990). We nonetheless remain mindful
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that a "district court would necessarily abuse its discretion if
it based its ruling on an erroneous view of the law or on a
clearly erroneous assessment of the evidence." Id. at 405.
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DISCUSSION
DISCUSSION
The issue before us is whether the district court's
imposition of attorneys' fees constitutes an abuse of discretion,
particularly in light of our reversal on the prepayment issue.
The Plaintiffs allege that the Defendants raised frivolous
defenses in bad faith solely to avoid their obligations under The
Agreement so that they could sell the securities to one of
Whitney Brothers' competitors at a higher price. Accordingly,
the Plaintiffs contend, the fee award is appropriate despite our
reversal on the prepayment issue. The Defendants maintain that
they resisted the Plaintiffs' attempts to implement The Agreement
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in good faith because, inter alia, (1) the Plaintiffs insisted
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that the note was prepayable, and (2) they were legitimately
concerned that the Plaintiffs were both financially and legally
incapable of fulfilling their obligations under The Agreement.
The Defendants further maintain that our reversal on the
prepayment issue completely justifies their position throughout
the course of the litigation, and that the district court
therefore abused its discretion in assessing attorneys' fees
against them.
With regard to the original finding of bad faith, the
district court stated the following:
A retrospective look at this litigation
reveals Defendants' bad faith in
resisting their obligation to perform
under The Agreement. In support of its
bad faith ruling, the Court makes the
following observations and findings:
1. In initially resisting their
obligation under The Agreement,
Defendants relied primarily upon the
argument that Plaintiffs were not
financially able to perform. However,
Defendants advanced no expert opinion
either to support their claim or to
counter the opinion of Plaintiffs' expert
that Plaintiffs were indeed ready and
able to perform. Moreover, The Agreement
itself certainly did not explicitly
contemplate the sort of financial "veto
power" Defendants attempted to assert in
the earlier stages of this case.
Finally, an examination of the financial
data advanced by Plaintiffs' amply
supports a finding that Plaintiffs were,
in fact, in a position to perform under
the Agreement;
2. Samuel Sprafkin, despite his
fiduciary obligation to Whitney as a
director thereof, actively opposed
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implementation of the oral agreement that
Plaintiffs' obligation under The
Agreement would be prepayable without
penalty;
3. Both David and Samuel Sprafkin
testified that Samuel Sprafkin did not
speak with E.F. Greene during the course
of the August 10, 1989, meeting. In
light of all the evidence in this case,
such testimony simply was not credible;
4. Both David and Samuel Sprafkin
testified that prior to being shown a
copy of The Agreement during the August
10, 1989, meeting at the Barenholtz'
home, they had forgotten about it. Such
testimony simply was not credible;
5. Defendants' sole reason for
proceeding to trial after the Court had
ruled on the parties' cross-motions for
summary judgment was to seek the
utilization of the Schimmel appraisal in
implementing Article Three of The
Agreement. The Schimmel appraisal was,
however, so lacking in factual foundation
that it would not have assisted the trier
of fact on the issue of the securities'
value. It thus would have been ruled
inadmissible under Rule 702, Fed. R.
Evid., were the price issue not resolved
at the summary judgment stage of these
proceedings. (In so stating, the Court
adopts in toto the argument set forth in
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the Plaintiff's Motion to Strike the
Testimony and Report of Alfred E.
Schimmel.)
Nonetheless, despite both Defendants'
acknowledged duty as trustees to advance
a competent appraisal, see Tr. VI, 118,
and the obvious inadequacy of the
Schimmel appraisal, Defendants continued,
indeed continue, to endorse the Schimmel
appraisal.
While perhaps none of the foregoing
facts and findings, standing alone, would
persuade the Court to award Plaintiffs'
all of their fees, the sum total of the
delineated behavior convinces the Court
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that such a fee award is appropriate.
Indeed, the record overwhelmingly
indicates that Plaintiffs should never
have had to institute this action to
enforce their clear right to purchase the
disputed securities pursuant to The
Agreement. [FN17]7 Accordingly, the
Court rules that Plaintiffs are entitled
to recover their attorneys' fees from
Defendants. . . .[FN18]8
Whitney Bros. Co., No. 90-054-S, 1992 WL 686272 at *7.
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We must first analyze whether our reversal on the
prepayment issue significantly affects the overall integrity of
the fee award. The order states that "the record overwhelmingly
indicates that Plaintiffs should never have had to institute this
action to enforce their clear right to purchase the disputed
securities pursuant to The Agreement." It enumerates five
instances of alleged bad faith, including the Defendants'
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7 Footnote 17 states: "At minimum, Defendants could have
accepted the December 13, 1990, Tender, which adopted Defendants'
purchase price, and terminated this costly litigation." Whitney
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Bros. Co., No. 90-054-S, 1992 WL 686272 at n.17.
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8 Footnote 18 states:
The Court's decision to hold
Defendants responsible for all of
Plaintiffs' fees in this case has been
made with due consideration of the fact
that the price issue should have been
disposed of at summary judgment.
However, the Court's ruling on fees is
necessarily informed by the bad faith
Defendants exhibited throughout the
six-day trial. In light of Defendants'
bad faith, the Court finds that it would
be patently unfair to require Plaintiffs
to pay any amount of the attorneys' fees
in this case.
Id. at n.18.
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continuous insistence that the debt was not prepayable, and
clearly states that the fee award is predicated on the "sum total
of the delineated behavior."9 Accordingly, because our reversal
on the prepayability issue undermines the fee award, we therefore
must determine whether the other enumerated instances of bad
faith are sufficient to support the fee award.
We begin by emphasizing that the district court
assessed the fees pursuant to the court's "inherent power" to
"manage [its] own affairs." Link v. Wabash R. Co., 370 U.S. 626,
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630-31 (1962). It is beyond serious dispute that a district
court may use its inherent powers to assess attorneys' fees
against a party that has "'acted in bad faith, vexatiously,
wantonly, or for oppressive reasons,'" Chambers, 501 U.S. at 45-
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46 (quoting Alyeska Pipeline Service Co. v. Wilderness Society,
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421 U.S. 240, 258-59 (1975)); see also Roadway Express, Inc. v.
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Piper, 447 U.S. 752, 765-66 (1980) (recognizing "bad faith"
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exception to general rule that federal courts cannot ordinarily
make fee-shifting awards); Jones v. Winnepesaukee Realty, et al,
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990 F.2d 1, 3 (1st Cir. 1993)(citations omitted). Nevertheless,
"[b]ecause of their very potency, inherent powers must be
exercised with restraint and discretion." Chambers, 501 U.S. at
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44 (citation omitted). Accordingly, a court's inherent power to
shift attorneys' fees "should be used sparingly and reserved for
egregious circumstances." Jones, 990 F.2d at 3. Significantly,
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9 As we noted above, the district court took this statement into
consideration by reducing the fee award to the extent that the
fees were attributable to the prepayment issue.
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we have held that a district court exercising its inherent powers
in this fashion must describe the bad faith conduct with
"sufficient specificity," accompanied by a "detailed explanation
of the reasons justifying the award." See Gradmann & Holler v.
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Continental, 679 F.2d 272, 274 (1st Cir. 1982) (vacating fee
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award for district court's failure to provide a sufficiently
detailed justification)(citing F.D. Rich Co. v. United States ex
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rel. Industrial Lumber Co., 417 U.S. 116, 129 (1974)); cf.
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Jones, 990 F.2d at 3-4 (holding that the district court's
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"specific, meticulously detailed finding of bad faith" was
supportable on appeal). These principles, when combined with the
effect of our reversal on the prepayment issue, render the order
assessing fees unsustainable.
The district court predicated its first finding of bad
faith on the Defendants' failure to advance expert testimony in
support of their earlier insistence that the Plaintiffs were
financially incapable of performing. We agree that a district
court could find bad faith where a party maintains an unfounded
action or defense without any reasonable hope of prevailing on
merits. See Chambers, 501 U.S. 32; see also Perichak v.
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International Union of Elec. Radio & Machine Workers, Local 601,
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AFL-CIO, 715 F.2d 78, 83 (1978) (awarding fees because plaintiff
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brought action without "any reasonable prospect of prevailing on
the merits"); Nemeroff v. Abelson, 704 F.2d 652, 659-60 (2d Cir.
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1983) (affirming an award of fees based on a finding of bad faith
in maintaining an action after it became clear that the claim was
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no longer colorable). Nevertheless, the facts here are not so
clear. In their cross-motion for summary judgment, the
Defendants advanced eight grounds for resisting their obligations
under the Agreement. The stated grounds included the following:
(1) Whitney Brothers' financial condition would not have
permitted it to make the installment payments; (2) Whitney
Brothers' funds were restricted because its bank had liens on the
company's assets; and (3) payment of the note would be unlawful
because, under New Hampshire corporate law, a corporation can
repurchase its own shares only with unrestricted surplus.
Although the district court's Summary Judgment Opinion holds that
none of the stated grounds preclude the stock repurchase
contemplated by the Agreement, neither it nor the subsequent
order imposing fees explains how these defenses are frivolous or
why they were objectively or subjectively unreasonable at the
time they were advanced. Cf. Blue v. U.S. Dept. of Army, 914
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F.2d 525, 544 (4th Cir. 1990)(finding that district court's
claim-by-claim description of the frivolous nature of the
plaintiffs' complaint demonstrated clearly that their "widespread
charges of racial discrimination [were leveled] without any
regard for the truth . . . in order to harass and embarrass the
personnel at Fort Bragg").
The third and fourth instances of bad faith were
predicated on the district court's belief that both David and
Samuel Sprafkin had offered testimony that "simply was not
credible." We have no doubt that when a party has materially
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perjured himself, this, standing alone, is sufficient grounds for
finding bad faith. See Chambers, 501 U.S. at 46 (noting that the
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"inherent power extends to a full range of litigation abuses);
see also Perichak, 715 F.2d at 84-85 & n.9 (3d Cir. 1983)
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(holding that the defendant's "'materially false statements
[made] under oath' are, having been critical to the success of
his case, alone, enough to support a finding of bad faith");
Carri n v. Yeshiva University, 535 F.2d 722 (2d Cir. 1976)
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(affirming fee award after a civil rights bench trial where the
court found that plaintiff's testimony was an "unmitigated tissue
of lies"). However, "[a] factfinder's decision that one party's
version of the events is more credible than the other party's is,
without more, insufficient to justify an award of attorneys' fees
. . . ." Roth v. Pritikin, 787 F.2d 54, 58 (2d Cir.
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1986)(discussing fee awards under the Copyright Act); see also
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Blue, 914 F.2d 544 (noting that "not every instance in which a
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district court credits one side's witnesses over another's is an
occasion for sanctions").
Here, the district court merely stated that the
Sprafkins' testimony, "[i]n light of all the evidence in this
case, . . . simply was not credible." It set forth no
explanation for this conclusion. We think that a district court
cannot predicate the use of its inherent powers on a mere
conclusory statement that the witnesses were not credible. Cf.
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Blue, 914 F.2d at 544 (holding that although the fee award was
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assessed against plaintiffs in a complex civil rights suit, it
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was proper because the district court's order imposing fees
meticulously describes each instance of perjury and bad faith).
Because the district court neither explained why it concluded
that the Sprafkins had perjured themselves nor explained why any
allegedly untrue statements were material, we cannot say that the
bad faith conduct was described with "sufficient specificity" or
accompanied by a "detailed explanation of the reasons justifying
the award." See Gradmann & Holler, 679 F.2d at 274. We
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therefore conclude that the district court abused its discretion
when it based the fee award on the unexplicated conclusion that
the Sprafkins "simply [were] not credible."
The court predicated its fifth finding of bad faith on
the Defendants' endorsement of the Schimmel appraisal. In its
order, the court found the Schimmel appraisal to be completely
lacking in factual foundation, adopting the Plaintiffs'
contention that "the trustees and their attorney found someone in
Mr. Schimmel who would say anything they wanted him to say."10
The Order states that the Defendants proceeded to trial for the
sole purpose of advancing the Schimmel appraisal "despite [their]
acknowledged duty as trustees to advance a competent appraisal."
The record fully supports this finding, indicating that the
Schimmel appraisal relied upon inflated rental and capitalization
rates and disregarded the fact that the Whitney Brothers facility
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10 The district court's fee order adopted in toto the
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Plaintiffs' arguments set forth in their Motion to Strike the
Testimony of Alfred E. Schimmel.
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was located in an "A-2 flood zone."11 The record also supports
the district court's finding that Schimmel neither associated
with a "qualified local appraiser" nor spent "sufficient time to
understand the nuances of the local market" as required by the
Appraisal Foundation's Standards of Professional Practice and
Conduct. Moreover, Michael Monks, a local industrial real estate
broker testified that the Sprafkins were aware of the infirmities
infecting the Schimmel opinion before they advanced it at trial.
Consequently, we find that the district court's fifth finding of
bad faith was well grounded in the record and set forth with
sufficient particularity and is accordingly sustainable on
appeal.
The district court's fee order indicated that it
predicated the fee award on the cumulative effect of five
specific instances of alleged bad faith and its finding that the
"record overwhelmingly indicates that Plaintiffs should never
have had to institute this action to enforce their clear right to
purchase the disputed securities pursuant to The Agreement."
Although we affirm the fifth finding of bad faith, the First
Appeal obviated the second, and further examination of the order
seriously undermines the facial validity of the remaining three.
Moreover, we do not agree that the record overwhelmingly
indicates that the Defendants improperly forced the Plaintiffs to
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11 Mr. Green testified that the area floods not only seasonally,
but also during periods of heavy rain. We think the district
court was entitled to find that this data would have been
considered in any competent appraisal.
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file suit. As we noted above, neither the district court's
Summary Judgment Opinion nor the Order explains why the defenses
maintained by the Defendants were objectively or subjectively
unreasonable when asserted. Perhaps more significantly, the
Defendants ultimately prevailed on the prepayment issue,
apparently vindicating their rejection of the Plaintiffs' initial
tenders. This case involves a complex set of facts and events
that occurred both in and out of court. In the end, we think the
district court's cursory explanation of the bases for the fee
award is simply inadequate, particularly in light of the fact
that no hearing was held on the issue.
We remain cognizant of the Supreme Court's
pronouncement that appellate tribunals should give deference to
the district courts' determinations on sanctions in order to
"streamline the litigation process by freeing the appellate
courts from the duty of reweighing evidence . . . already weighed
and considered by the district court." Cooter & Gell, 496 U.S.
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at 404. In the context of a court's inherent powers, however,
this deference is only proper where the district court has
explained its actions with sufficient detail. Accordingly, we
find that the combined effect of our reversal on the prepayment
issue and the district court's failure to adequately set forth
its justifications render its imposition of attorneys' fees an
abuse of discretion. We therefore vacate the district court's
fee order and remand so that the district court can make specific
findings consistent with this opinion.
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Vacated.
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